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The Responses of the Prime Rate to a Change in Policies of the Federal Reserve

Author

Listed:
  • Joseph Friedman

    (Department of Economics, Temple University)

  • Yochanan Shachmurove

    (City College of New York)

Abstract

This paper studies the reactions of commercial banks to the changes in monetary policy tools in mid-1994, when the Federal Reserve Bank altered its policy implicitly targeting the Federal Funds Rate (FFR). Prior to 1994, the FFR had affected, with a considerable lag, the Prime Rate. However, after the move by the Fed in 1994, commercial banks responded immediately by changing their Prime lending rate to the Federal Funds Rate plus a three-percent spread. Based on the response of commercial banks, it is evident that a more transparent monetary policy can, in fact, more effectively achieve its underlying objectives.

Suggested Citation

  • Joseph Friedman & Yochanan Shachmurove, 2014. "The Responses of the Prime Rate to a Change in Policies of the Federal Reserve," DETU Working Papers 1405, Department of Economics, Temple University.
    • Handle: RePEc:tem:wpaper:1405
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    File URL: http://www.cla.temple.edu/RePEc/documents/DETU_14_05.pdf
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    References listed on IDEAS

    as
    1. Forbes, Shawn M. & Mayne, Lucille S., 1989. "A friction model of the prime," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 127-135, March.
    2. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    3. Jianzhou Zhu & Manfen Chen & Wanli Li, 2009. "Recent changes in the prime rate behavior," Review of Quantitative Finance and Accounting, Springer, vol. 33(2), pages 177-192, August.
    4. Rik Hafer, 1983. "The prime rate and the cost of funds: is the prime too high?," Review, Federal Reserve Bank of St. Louis, vol. 65(May), pages 17-21.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Heung Soon Jung & Dong Jin Lee & Tae Hyo Gwon & Se Jin Yun, 2015. "Reference Rates and Monetary Policy Effectiveness in Korea," Working Papers 2015-27, Economic Research Institute, Bank of Korea.

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    More about this item

    Keywords

    Federal Fund Rate; Prime Rate; Federal Reserve Bank; Monetary Policy; Commercial Banks; Vector Auto Regression (VAR); Vector Error Correction (VEC); Interest Rate Targeting; Unit Root Tests; Granger Causality; Variance Decomposition;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G00 - Financial Economics - - General - - - General
    • G2 - Financial Economics - - Financial Institutions and Services
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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